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How to Play SMART Modular After a Quick 34% Profit

The buy-in window is closing -- what should you do now?

Three months ago, I showed you a fantastic buy-in opportunity on SMART Modular Technologies(Nasdaq: SMOD), and it looks like I was right: The stock is up by 34% since that recommendation, including a 4.5% increase on last night's second-quarter report.

SMART Modular jumped a little bit yesterday on good news from fellow computer memory specialistMicron Technology(Nasdaq: MU): Memory prices have stabilized or in some cases started rising. Today, the company cemented that gain with a good-looking report of its own.

In the second quarter, SMART Modular's sales rose 6.4% year over year to $170.5 million. The price drops on DRAM memory modules in SMART's core Brazilian market continued in the second quarter, and the company is already selling those modules as fast as it can make 'em, so there's no volume gain to be had from lower prices here. That's the bad news.

On the plus side, management has called an end to the DRAM price erosion based on recent order trends. Demand remains strong, manufacturing efficiency is improving, and so stable end-product prices will lead to stronger margins in coming quarters. Also, SMART is spending the majority of its capital expense account on building out its manufacturing lines in Brazil, in order to capture the high demand in that market.

It also helps to have a large exposure to the less price-sensitive corporate systems market. In the second quarter, SMART's three largest customers were Hewlett-Packard(NYSE: HPQ), Dell(Nasdaq: DELL), and Cisco Systems(Nasdaq: CSCO), with server and storage systems becoming an ever-larger share of the overall mix.

So the short-term buying opportunity may have passed, but SMART is still a well-run company in an increasingly attractive industry that seems to have put the latest round of damaging price wars behind it. This stock deserves every one of its four CAPS stars, and your best move today might be to add SMART to your Foolish watchlist so you can act on the next indefensible, crazy price dip.